In January 2009, Barack Obama was inaugurated as the forty-fourth president of the United States and handed a financial calamity that almost everybody believed was caused by banks run amok. In the same month, Paul A. Volcker first went public with his idea to split banking from risky trading to put a safe distance between the banks that the average American trusts to guard his money and those gambling on everything from the weather patterns in Africa to interest rates in Malaysia.

Although Volcker had been among Obama’s circle of economic advisors during the election campaign, his groundbreaking idea didn’t get much attention from the new president or his top economic brass initially. In fact, Volcker struggled to start up a committee of outside business and academic advisors that he was supposed to lead because Timothy Geithner and Lawrence Summers—Obama’s closest advisors on economic matters—tried to keep the then-81-year-old Volcker at a safe distance. But the man who tamed U.S. inflation in the 1980s as the Chairman of the Federal Reserve wasn’t one to give up easily.

He complained about being kept out and got his group established in April. He led a small subgroup of his committee to meet with Obama in June, explaining the idea of the banking-trading separation. He met with more than a dozen senators who were willing to listen to it. Some of those senators were close to Vice President Joe Biden, who by that time was interested in Volcker’s idea. In a White House meeting in December, in which different proposals for bank regulation were being debated, Biden told the group, which included Geithner and Summers: “I’ve been listening to this stuff for six months, but only Volcker makes sense.” On Christmas Eve, when Volcker was heading to Virginia with his wife for the holidays, Summers—who had been opposed to the idea all along—asked him to stop by in Washington and talk about it more. Right after New Year’s, Geithner’s office called to inquire, too.¹ In January 2010, after a year of drum-beating, Volcker stood behind Obama with the smile of a tired warrior in a press conference during which the president presented Volcker’s idea as a new addition to his administration’s package of financial reforms and labeled it the Volcker Rule.

Like Volcker, a handful of other men and women have fought hard since the 2008 financial crisis to rein in the banks so they wouldn’t continue taking the huge risks that brought down the global financial system. These fighters have met resistance from the banks’ powerful lobbyists and their political allies. The rules they introduced got defeated or softened in lengthy battles. Their stories show the power of the financial sector and the difficulty in curbing that influence. But it’s not all gloom and doom, either—the perseverance of these fighters have led to some achievements that will help the United States cope with future financial crises. The Volcker Rule, if enforced vigorously by regulators, could restrict the amount of gambling that banks do. The ability of the FDIC to seize failing bank-holding companies in addition to just banks (something Sheila Bair fought hard for) could make the largest firms more disciplined. The consumer protection agency, Elizabeth Warren’s brainchild, may prevent banks or other financial institutions from being able to concoct enticing mortgage products that might then crash the market.

But more could have been done. Every crisis presents a pristine opportunity for policymakers to push through changes that would be hard to accomplish politically during normal times. Unfortunately that opportunity was squandered for the most part due to wrong priorities and bad advice.

Missed Opportunity

In early 2009, banks were vulnerable and politically weak to a degree that had been unseen for decades. Opinion polls showed widespread public anger toward them as the culprits of the worst economic downturn since the Great Depression.² The government had just rescued Citigroup and Bank of America, and even the strongest financial firms like Goldman Sachs had survived thanks to liquidity support from the Fed. Congressional leaders like Barney Frank and Christopher Dodd, who had consistently relied on campaign contributions from the financial industry and been their allies, were no longer willing to appear to be friends. Obama was elected on campaign rhetoric that bashed the banks and promised real change. After two decades of deregulation promoted and backed by Republican and Democratic administrations, the winds were strongly blowing against the sector. In the 1990s and 2000s, until the crash, consumer advocacy groups couldn’t even get a vote to be held on any proposed reform that the banks opposed. But in 2009, the financial-services industry was already beginning to lose some battles. In May of that year, Congress overwhelmingly approved legislation that would restrict the fees they could charge on credit cards, a long-running sore spot for consumers.³ Citi and Bank of America were still partially owned by the government and had to keep their voices down in Washington. Some of the largest trade associations that represent the banks’ interests at the capital were divided and weak. All this represented a great opportunity to the new administration and the revamped Congress to establish a stronger regulatory regime that would reduce the likelihood of similar crises in the future. Unfortunately it went unused for the most part.

The relatively healthier banks were allowed to pay back their TARP funds in June 2009, the same month that the Treasury released its blueprint for new banking rules. JPMorgan Chase, Goldman Sachs, and other heavy hitters resumed their full-fledged lobbying activities just as Congressional leaders were getting ready to draft the legislation. In December, Citi and Bank of America were also allowed to pay back their government money and join the fray. Because Obama made health-care reform his priority, financial changes took the backseat and were delayed for months while Washington focused its energy on the former. And when it took the front stage finally, bickering among Democrats made it harder to push through strong regulations. Their lack of action also angered voters, who gave Republicans several election victories at the end of the year, including Scott Brown winning the late Ted Kennedy’s senate seat in Massachusetts. All this gave the banks and their trade associations ample time to regroup, regain their strength, and fight vigorously against any attempt to restrain their risky activities. It also cost the Democrats their supermajority in the Senate, meaning they would need some Republican support to pass any law.

The electoral setback also jolted Obama to action, says Joseph Engelhard, a former U.S. Treasury deputy assistant secretary who is now a political analyst at Capital Alpha Partners. Volcker was seen by the public as the wise old man who wasn’t afraid to stand up to Wall Street, so his idea had to be included in the reform package to regain credibility in the public’s eyes, according to Engelhard. “Volcker was always sort of on the outside, and Geithner and Summers would have kept him there if it weren’t for the election losses,” Engelhard says. So Obama twisted the arms of his economic lieutenants to bring Volcker into the fold and made the January 2010 announcement about the Volcker Rule, even though both Frank’s bill that had passed the House in December and Dodd’s Senate version drawn up a month earlier had no mention of the separation of trading from banking. When Dodd only put in a vague section on the Volcker Rule in his revised set of rules in March, not laying out how it would be done, some senators spoke out and it became clear that Volcker wasn’t fighting alone.

Volcker’s Friends and Enemies

Senators Jeff Merkley of Oregon and Carl Levin of Michigan introduced an amendment to Dodd’s bill that incorporated all of Volcker’s ideas into legislative language.⁴ The two senators then became the top generals in the fight to get the strongest Volcker Rule possible into law. Merkley was among the senators who met with Volcker in the summer of 2009, when the former Fed Chairman was making the rounds on Capitol Hill. The Oregon senator had seen the original proposal from Volcker and wanted to find out more. He was among the earliest converts. Levin got interested in the idea after executives of small companies from his state complained about the big banks and the lack of credit available. Community banks told Levin and his staff how Bank of America had stolen their clients in the boom years by offering cheaper loans and had now deserted those customers due to its financial difficulties. But the Michigan senator became a true convert while the Senate Investigations Subcommittee he chairs looked into Goldman’s sale of toxic collateralized debt obligations (CDOs) to its clients, just as the housing market was showing cracks. During his committee’s investigation and the hearings they culminated in, Levin saw the true face of the top financial institutions and wanted to curtail their bets against their customers with the knowledge they have as their brokers.

The Merkley-Levin amendment introduced in May wasn’t only more detailed than the placeholder that Dodd had put into his bill in March, it was also much stricter than the initial language proposed by the Treasury to Congress. The Treasury’s original text would leave much of the rule’s tenets to be decided by the regulators and provided narrow definitions of proprietary trading—a bank using its own funds to make market bets. The senators’ proposal laid out the details of how such bets would be restricted and how they’d be defined, with a much more encompassing range.⁵ As the negotiations on the final shape of the Volcker Rule took place in May and June, Merkley and Levin coordinated with Volcker in twice-a-week conference calls. Michael S. Barr, who was the assistant secretary for financial institutions at the time, was the administration’s point man on the discussions. Barr, whose academic passions lay with consumer protection, focused more on that part of the Dodd-Frank reform package and wasn’t always there to back Merkley and Levin as the provisions of the Volcker Rule came under attack. At times, it felt like the two senators were fighting against the Treasury to keep the rules tight, instead of alongside it. The banks, which had lobbied Merkley and Levin early on, gave up on them as too close to Volcker and took their concerns to the Treasury, which then regularly voiced those in the debate. The Treasury also wanted more say on the matter by the financial regulatory council that the new law was about to establish since it was going to be chaired by the Treasury Secretary.

The Office of the Comptroller of the Currency (OCC), which monitors national banks, wasn’t always on Volcker’s side either. There were friendly OCC staff who’d go along with the senators’ positions only to be overturned by Julie L. Williams, the chief counsel of the regulator since 1994. Williams had led the OCC’s successful fight in the early 2000s against state attorneys general who tried to go after banks in their jurisdictions, arguing that federal banking law trumped their powers.⁶ The OCC didn’t rein in the national banks nor did it allow state regulators to do so, one of the reasons behind their unfettered growth through unchecked activities. The Fed and the FDIC weren’t much involved in the Volcker Rule discussions, though the FDIC was supportive and provided research help to the senators to back their positions. Throughout Dodd-Frank negotiations, those involved in the discussions say, Bair’s FDIC was on one side of the debate—tough rules to make sure risk was curtailed—and the OCC was on the other, with the Fed in the middle. At the beginning, even the Fed was on the opposition side, Bair says. But with the amount of increased responsibility Dodd-Frank is giving the central bank, it has come more toward the middle. The OCC naturally sees things more from the banks’ perspective because it has a closer tie as their direct regulator, with examiners who reside in the financial institutions, Bair says. Others are more mincing with their words. “OCC works like the banks’ trading association,” says Daniel Alpert, founder of investment bank Westwood Capital and a financial restructuring expert.

Fear of Lincoln’s Amendment Helps Volcker

One development that helped Levin and Merkley in their fight to get the Volcker Rule passed through Congress was a proposal by Blanche Lincoln, a Democratic senator from Arkansas who headed the Senate Agriculture Committee. Lincoln’s amendment to the regulatory reform package suggested cordoning off units of banks that do any derivatives from the depository institutions.⁷ That was seen as too far out there by Geithner, Dodd, and others trying to keep things in the center, who were frightened that it would drive away moderate Democrats and any Republican who’d back the financial reforms otherwise. The more that support for the Lincoln provision widened, the more mainstream the Volcker Rule looked in comparison. The Treasury called Volcker and his aides multiple times, asking him to speak out against the Lincoln approach. Finally Geithner himself called Volcker to make the request in person. The wise man agreed to do so, sending a letter to senators arguing that the Lincoln amendment’s “extensive reach” wasn’t necessary for sound regulation and that the Volcker Rule would do the trick.⁸ In turn, his rule got more backing from Geithner, Dodd, and other Democratic leaders involved.

A final hurdle came from Scott Brown, the newly elected Massachusetts senator who’d become a key to the success of the reform bill clearing the chamber because Democrats needed four Republican votes to overcome a filibuster. One part of the Volcker Rule—prohibiting banks from owning hedge funds or private equity firms—would hurt State Street and Bank of New York Mellon, the former headquartered in Boston and the latter with significant presence there. So the lobbyists for those two firms camped in front of Brown’s office for days, pressing him to get that section softened. These custodian banks, known as conservative institutions that don’t take risk, were putting some of their clients’ (such as pension funds) money into unregistered fund pools so they’d escape certain fees, and some of those had invested in subprime mortgages and blown up during the crisis. State Street ended up buying $2.5 billion of toxic assets from such funds it administered.⁹ Because such investment vehicles counted as hedge funds and both firms had banking charters, they wanted the Volcker Rule’s prohibition of banks owning hedge funds to be softened.

Dodd, who’d announced that he wasn’t going to run for reelection, wanted to leave a legacy with some sort of reform enacted by Congress before he retired, and he needed Brown’s vote for closure of debate in the senate. He weighed in with Merkley and Levin to cave in to Brown’s demands. Obama wanted to have the U.S. reform in his pocket when he was going to meet other world leaders at the Group of 20 meetings coming up, so the administration pushed for a compromise too. One such compromise came when Volcker’s hedge fund rule was watered down during negotiations that went into the wee hours of the night. The former Fed Chairman wasn’t happy with what he was told the next morning, but he realized that was the best the political system was going to deliver at that conjuncture. Consequently, he issued a vague statement that praised the trading ban of the final version without mentioning the weakened hedge fund part.¹⁰ Even after the weakening, the Volcker Rule is on top of U.S. banks’ hate lists. In private conversations, public speeches, and reports, executives vent their frustrations about the regulation consistently. Whether it will live up to its expectations will depend on strict implementation by regulators. Meanwhile, Volcker has been sidelined, having been pushed out of his formal advisory role in January 2011.

The Republican Toughie

Although Republicans are generally thought of as advocates of de-regulation and less government, the lines aren’t so clear cut. While some Republicans have been proregulation, Democrats have been just as responsible in the two decades leading up to the 2008 crisis for dismantling rules that let banks run free. President Bill Clinton’s Treasury Secretaries Robert Rubin and Lawrence Summers were as gung ho about unshackling the banks as their counterparts in both Bush administrations. Rubin (Geithner’s mentor) and Summers (Obama’s top economic advisor for the first two years of his presidency) put their signatures to two major efforts at deregulation, both directly responsible for the fomenting and enormity of the meltdown. They dismantled the Glass-Steagall Act of 1933, which had separated investment banking from commercial banking and provided relative financial stability for the next 70 years. They also prevented, with the help of former Fed Chairman Alan Greenspan (originally a Republican appointee), the regulation of derivatives, which then grew to a global market of $700 trillion.¹¹

A lifelong Republican, there was very little hint of the proregulatory stance Bair would take as the head of the FDIC before her nomination by George W. Bush in 2006. Bair had worked for Republican Senate Majority Leader Robert Dole for eight years and served as Assistant Treasury Secretary in Bush’s first term. Perhaps the only clue might have come from her membership on the board of the Center for Responsible Lending, a nonpartisan group that has advocated better regulations for mortgages and other bank loans. Still, Bair’s candidacy sailed through, unlike the top choice for the job, Diana Taylor, whose antigun views drew the wrath of the National Rifle Association and led Bush to drop her before going public with her nomination.¹² Bair shone as the most sensible regulator during the last few months of Bush’s presidency, fighting for the rights of the taxpayer during the height of the crisis as Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke, and NY Fed President Timothy Geithner rushed to save the big banks at any cost. Bair also outshone most of her Democratic colleagues in Obama’s first three years pushing for the toughest regulations to reduce future risks of the banks and lessen the bill for the government. “There were interesting issues that attracted me to the position, but those were not the ones that I ended up dealing with,” she says. “I thought it was going to be a 9-to-5 kind of job.”

Bair fought Geithner on the rescue of Citigroup to make sure unnecessary subsidies weren’t provided and that shareholders paid for the mistakes. She also pushed for a management change but didn’t get to win that one. “Geithner hates Bair because she was doing her job, and Geithner was trying to subsidize the banks,” says Joseph Stiglitz, a former advisor to Clinton and Nobel laureate in economics. Another proregulation Republican, Senator Susan Collins of Maine, approached Bair as Dodd-Frank was being formulated. Collins, who had started her public career as a financial regulator in her state, felt that something had to be done with the capital of the biggest banks to make them safer. She asked Bair whether they could formulate something together. So they came up with the Collins Amendment, which put a floor on how much capital bank holding companies need to hold and eliminated the use of some hybrid bonds as capital. Collins was among the four Republicans who voted for Dodd-Frank at the end.

Bair thought even Glass-Steagall could be revived, but she was disappointed to see very little support for that idea. Another Republican, Senator John McCain, was a co-sponsor of a bill that would bring Glass-Steagall back. It didn’t garner much support when McCain, Obama’s rival in the 2008 presidential elections, didn’t put his weight behind it. Bair successfully fought for a resolution authority that could wind down the holding companies. The FDIC previously had authority only to seize and liquidate the depository banks, which are only one part of the giant financial conglomerates. She didn’t get her wish to have an additional fund to pay for such a resolution that would be collected from the largest banks in advance (more on the merits of these rules in Chapter 11). Because of her tough stance, “the big banks hate Bair,” says Edward Kane, professor of economics at Boston College.

In addition to her advocacy at home, Bair was the leading proregulatory voice representing the United States internationally. The Basel Committee on Banking Supervision, which sets capital standards for banks worldwide, debated stronger standards in 2009–2010. She championed and won a global leverage standard, a simple capital-to-assets ratio that ignores the sophisticated and easily gamed risk-weighting of assets so as to put a hard cap on the borrowing of banks. This idea was ridiculed when she first floated it internationally in 2006. She was called a Luddite by some of her critics at the time because risk management had advanced so much that a simple consideration of total assets without paying attention to their risk looked way out of date. Of course, Bair was proven right when the banks blew up. All their claims of having mastered risk management so well evaporated when those risks brought them down. And, their capital levels were incredibly low to cope with the losses thanks to Basel rules allowing smaller reserves in the 2000s with the help of the risk-weighting magic. The European banks leveraged themselves up to the tilt before the crisis because they had no simple leverage ratio. The U.S. banks already had such a ratio domestically implemented, so they shifted the toxic assets to German landesbanks or hid them in off-balance-sheet entities. The new Basel leverage standard agreed in 2010 includes off-balance-sheet assets in the calculation of the total, in order to close that loophole.¹³

Germany, France, and some other countries worried that their banks could not comply with the tougher rules. In exchange for getting tougher rules accepted, Bair and her proregulation allies on the Basel committee compromised on the timing of their implementation. So the definition of capital was narrowed, a new leverage ratio was brought in, the minimum capital ratios were increased, the calculation of risk was streamlined to crack down on manipulation, but the implementation of all these were spread out to a decade or more. And since everything was finalized in December 2010, cracks have already appeared in implementation in Europe and the United States. The Europeans are balking at enforcing the leverage ratio and other provisions of Basel III.¹⁴ U.S. regulators dragged their feet in writing Basel changes into the rulebook, hoping that they could soften them after Bair’s departure in mid-2011. There were no signs of progress two months after she left either.

Finding Ways to Skinny the Banks

Alongside Bair’s resolution authority and the Volcker Rule, there were other attempts to enact legislation to clamp down on the financial sector’s risks. Senators Sherrod Brown and Ted Kaufman, Democrats from Ohio and Delaware, respectively, were consistent backers of stronger banking rules. They supported Levin and Merkley in their fight. Yet they wanted to do more, especially to rein in the biggest U.S. banks, which had become too big to fail and were rescued with taxpayer money during the crisis (Figure 8.1). So in April 2010, they introduced the Safe Banking Act to put concrete limits on the size of the nation’s lenders. The proposed law targeted the nondeposit liabilities of banks and put a cap on them (each couldn’t exceed 2 percent of the nation’s GDP).¹⁵ That would force the six largest banks—Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley—to break up. Wells Fargo, which is mostly deposit-focused, would be the least impacted and could get away with a 1 to 2 percent contraction, whereas the other five would have to shed 30 to 50 percent of their assets or divide themselves in two to comply with the act. Their legislation would complement the Volcker Rule, Kaufman says. “All of these are ways to skinny the banks so they aren’t too big to fail,” says the former Biden aide who filled his senate seat when Biden became vice president.

Figure 8.1 Bigger Borrows Cheaper. The gap between the funding costs of banks with assets more than $100 billion and those with assets between $10 billion and $100 billion.

SOURCE: nci Ötker-Robe, Aditya Narain, Anna Ilyina, Jay Surti, “The Too-Important-to-Fail Conundrum: Impossible to Ignore and Difficult to Resolve.” International Monetary Fund, Monetary and Capital Markets Department report, May 27, 2011. Based on FDIC data and IMF staff computations.

The proposal came under attack from the banks immediately and the Treasury, of course. JPMorgan, which had usurped Bank One in 2004 and still has about 10,000 employees based in Columbus—a remnant of Bank One’s operations there—warned Brown that his state would lose thousands of jobs if JPMorgan was forced to get smaller. Brown wouldn’t budge with that threat because he actually had seen how the merger of Bank One with JPMorgan led to 6,000 job cuts at the time. A Treasury memo to Brown’s office on a Saturday listed eight reasons why the department was opposed to the proposed legislation. Those reasons were mostly centered on the traditional argument made by banks all the time that risk needs to be taken into account when measuring size—the tenet that Basel II was based on and which was proved wrong during the crisis.

Despite Senate Majority Leader Harry Reid’s support, the Safe Banking Act didn’t make it too far. Republicans opposed it as a block even though Brown and Kaufman were hoping for some support from rural states where small banks and small companies are hurt by the largest banks. Because Dodd didn’t back the proposal, the Democratic members of the banking committee also went against it. “Dodd wanted a bill and this was too big a risk for him,” Kaufman says. So the act mustered only 33 votes in the Senate and died.

The Farm Boy versus Goliath

Thomas M. Hoenig was born and raised in a small Iowa town in the middle of farm country, went to college in Kansas, and straight out of school joined the regional Federal Reserve bank in Missouri, which covers all those states and a bit more farmland in neighboring states. He has spent his life dealing with farmers, small companies, and community banks, but he also had first-hand experience of too-big-to-fail (TBTF) financial institutions. When Oklahoma City-based lender Penn Square Bank ran into trouble in 1982, he was in charge of bank supervision and told his bosses that the bank wasn’t viable and the Kansas City Fed shouldn’t give it emergency loans. His response to Penn Square’s president asking for funds, which he calls the “sorry-Charlie-we’re-not-going-to-lend” letter, is framed in the ground-floor museum of the central bank. But Penn Square’s failure had far-reaching consequences, contributing to the collapse two years later of Continental Illinois Bank, considered to be the first TBTF case in U.S. financial history. Although Continental Illinois was rescued by the Fed, at least its shareholders were wiped out and taxpayers got the proceeds from its recovery, Hoenig says three decades later. “That was much better than the rescues this time around,” adds Hoenig.

Soon after becoming the Kansas City Fed’s president in 1991, Hoenig started to speak against TBTF banks and the dangers they pose for the financial system. He raised the issue in Fed meetings in Washington when Greenspan was the chairman. “There was silence on the other side of the table,” recalls Hoenig of the former Fed Chairman’s approach to any demand for more regulation. “It wasn’t only Greenspan’s philosophy, but also that of Congress, administration, regulators too. The momentum was to deregulate.” He spoke against Basel II relaxing capital requirement for banks, bringing it up with Greenspan’s successor Bernanke. The new chairman seemed to listen more, but he didn’t move to do anything differently either. After the 2008 crisis, Hoenig pressed Bernanke and the other Fed governors in Washington to support more stringent regulation on the biggest banks, to no avail. He sent them a detailed proposal on how TBTF banks should be resolved in the future. Nobody was interested. “Rescuing bad banks isn’t capitalism; it’s corporate socialism,” he says.

Starting in early 2010, Hoenig also loudly opposed the Fed keeping its zero percent interest rate to help the wounded banks repair their balance sheets. While they’re being rescued with a backdoor subsidy, the policy is creating new bubbles worldwide, he argued: commodity prices surging, agricultural land prices going up in the United States, housing prices rising in China, and more. “It’s just a matter of time before another crisis comes to pop the current bubble we’re pushing,” Hoenig says. Even though he’s been a tireless warrior, Hoenig is on his way out, just like Bair, Volcker, and Kaufman. Hoenig will be retiring in October 2011 after four decades at the Kansas City Fed.

Never-Ending Assault

As some of the key combatants for stronger bank regulation depart, the rules that aim to rein in the financial sector are under continuing attack with even more vigor, as the banks have rebuilt their lobbying coffers with Fed’s covert subsidy. Volcker is worried that the regulators won’t interpret the prop trading rules as broadly as he and Congress intended. Bair is concerned regulators won’t use the resolution powers over financial conglomerates when the next crisis hits. Kaufman is anguished that the biggest banks have gotten bigger since 2008. While the regulators around the world debate implementing tougher rules, the banks play the governments against each other, making the age-old argument that if there’s too much regulatory burden in one place, they’ll move to another country with more lax laws. The European banks threaten to move to New York while the U.S. banks threaten to move to Europe.

Instead of holding the line and acting together to crack down on the industry, the governments on both sides of the Atlantic buy into these threats and weaken their planned rules consistently (Table 8.1). Two weeks after Barclays and HSBC—both London-based banks—issued veiled warnings that they might move shop, a British commission softened its proposal for new rules, dropping its demand for investment and commercial banking to split, à la Glass-Steagall.¹⁶ Hoping the public’s memory of the crisis is fading away, even the apologies made during the crisis are being reversed. Greenspan, who had pretty much said mea culpa for his lack of regulation and keeping interest rates too low for too long, began to publicly lobby against the implementation of Dodd-Frank reform package in early 2011.¹⁷ “Dodd-Frank is being lobbied down in the rule-making process since different regulators have to do that and they’re not all like the FDIC,” says Boston College’s Kane. As finance has gotten more and more complicated, the sector has also had an easier monopoly on information. “Since the banks are the gurus on financial everything, politicians believe them when they say it’ll be the end of the world if they fail,” says Stiglitz.

Table 8.1 What Made It and What Didn’t

Some of the fighters against that monopoly remain in the trenches. Elizabeth Warren, a law professor at Harvard University who has written books about the consumers’ plight, is shaping the new Consumer Financial Protection Bureau despite Geithner’s dislike of her. In mid-2011, Warren was playing a key role in the negotiations between state attorneys general and the big banks to straighten out their mortgage servicing practices. In September, she announced her candidacy for a Senate seat in Massachusetts to challenge Scott Brown. Senators Merkley and Levin plow on, introducing new legislation to hold the banks accountable, urging prosecutors to look into their abuse of clients, pressing the regulators to implement the financial reforms thoroughly.¹⁸ Bair, on her way out of the FDIC, appointed Volcker to a committee that will advise the bank regulator on how to wind down the biggest banks when they collapse.¹⁹ Volcker also continues to be the voice of wisdom, making public comments to hold the regulators’ and the politicians’ feet to the fire.

Notes

1. All the anecdotes and behind-the-scenes stories in this chapter are based on interviews with participants, their associates, and others who have knowledge of the events but who wanted to remain unidentified, unless a specific source is mentioned in the text or an endnote.

2. Washington Post-ABC News Poll, March 2009, www.washingtonpost.com/wp-srv/politics/polls/postpoll_033109.html.

3. Credit Card Act of 2009, H.R. 627, 111th Congress of the United States of America, signed into law May 22, 2009.

4. Jeff Merkley and Carl Levin, “Merkley-Levin Amendment to Crack Down on High-Risk Proprietary Trading,” joint press release, May 10, 2010.

5. Treasury Department, “Amendment to the Bank Holding Company Act Regarding the Size of Institutions and the Scope of Bank Activities,” proposed legislative text, sent to Congress March 3, 2010; Jeff Merkley and Carl Levin (co-sponsors), “Purpose: To Prohibit Certain Forms of Proprietary Trading, and for Other Purposes,” proposed Senate amendment, 111th Congress, 2nd session, S.3217.

6. Office of the Attorney General of Connecticut, “Attorney General’s Statement on OCC Effort to Undercut States’ Ability to Regulate National Banks,” State of Connecticut press release, January 8, 2004; Raymond Natter, “Spitzer Cases Affirm OCC’s Exclusive Authority,” working paper, December 2005; Harvard Law Review Association, “Federal Preemption. State Attorney General Power Southern District of New York Rebuffs Attorney General’s Bid to Regulate Nations Banks. Office of the Comptroller of the Currency v. Spitzer, 396 F. Supp. 2d 383 (S.D.N.Y. 2005)” Harvard Law Review 120, no. 2: 627–634.

7. Ronald D. Orol, “Sen. Lincoln Unveils Broad Derivatives Regulatory Bill,” MarketWatch, April 16, 2010.

8. Silla Brush, “Volcker Warns against Controversial Derivatives Provision in Wall St. Reform,” The Hill, May 7, 2010.

9. State Street Corp. Form 10-K for 2009, filed with the Securities and Exchange Commission on Feb. 22, 2010, note 20 on pp. 142–143.

10. Yalman Onaran, “Volcker Said to Be Disappointed with Final Version of His Rule,” Bloomberg News, June 30, 2010.

11. Bank for International Settlements, BIS Quarterly Review, December 2010.

12. Jim Rutenberg and Raymond Hernandez, “F.D.I.C. Post Seems Unlikely for New York Banking Chief,” New York Times, February 2, 2006.

13. Basel Committee on Banking Supervision, “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems,” published by the Bank for International Settlements, December 2010.

14. Jim Brunsden, “Barnier Says Leverage Ratio May Not Be Made Binding for EU Banks,” Bloomberg News, May 24, 2011; Brooke Masters, and Nikki Tait, “Basel III Break for Banks in EU as Draft Legislation Offers Loophole,” Financial Times, May 27, 2011.

15. Sherrod Brown and Ted Kaufman (co-sponsors), “S.3241: Safe, Accountable, Fair, and Efficient Banking Act of 2010,” proposed legislation, presented to 111th Congress on April 21, 2010.

16. Simon Nixon, “Will Barclays Turn Its Back on Britain for New York?” Wall Street Journal, March 30, 2011; Sharlene Goff and Patrick Jenkins, “HSBC Chairman Calls for ‘Systemic’ List to Cover More Than 80 Banks,” Financial Times, March 29, 2011; Phillip Inman, “UBS May Move Investment Bank to UK to Avoid Swiss Capital Regime,” The Guardian, May 26, 2011; Francesco Guerrera and Sharlene Goff, “UK Bank Proposal Closer to US Rules,” Financial Times, April 12, 2011; Ben Protess, “Wall Street Lobbies Treasury on Dodd-Frank,” New York Times, April 5, 2011.

17. Tom Braithwaite, “Greenspan Warns Dodd-Frank Reforms Risk ‘Market Distortion,’” Financial Times, March 29, 2011.

18. Jeff Merkley and Olympia Snowe, “Merkley, Snowe Introduce Bill to Hold Mortgage Servicers Accountable,” joint press release by the senators, May 12, 2011; Phil Mattingly, Robert Schmidt, Justin Blum, “U.S. SEC, Justice Department Probe Goldman Findings After Senate Referral,” Bloomberg News, May 4, 2011.

19. Federal Deposit Insurance Corporation, “FDIC Board Creates Advisory Committee on Systemic Resolutions,” press release, June 3, 2011.